If you’re looking for a chance to step away from work before retirement age, you may have heard of FIRE, which stands for “Financial Independence, Retire Early.” The movement, which consists of saving enough to leave a job before age 65, has been highlighted in blogs, books and individual stories, often from those who have accumulated enough wealth to support their lifestyle for the next several decades without having to bring in a salary.
However, there is more to the FIRE movement than carrying out a simple calculation and mapping out a timeline to retirement. A good starting point is to understand what is involved in achieving financial independence and what factors may arise during the saving and retirement steps.
What Is FIRE?
The FIRE strategy essentially has two components: financial independence and retire early. “It’s about saving and investing aggressively during your working years in order to create a portfolio along with passive income that enables you to step away from full-time work well before traditional retirement age,” says Gary Grewal, a financial planner and author of “Financial Fives.” For those involved in the FIRE movement, the goal might be to stop working in your 30s or 40s.
How Does FIRE Work?
The FIRE process begins by looking at how much you spend each year. Your total annual expenses can then be multiplied by 25. “That money, invested in mostly equities, will be enough to allow a person to live off the proceeds for at least the next 30 years,” says Jordan Grumet, author of “Taking Stock” and host of the Earn & Invest podcast. “This allows a safe withdrawal rate of 4% of total investments, inflation adjusted, each year.” If your annual expenses are $50,000, you could aim to set aside $1.25 million ($50,000 x 25). Once you have that amount, you could retire and withdraw 4% of $1.25 million annually, which would be $50,000 each year.
Alternatively, you might choose to invest in other assets besides equities. You could purchase real estate or use a side hustle to generate passive income that grows to be enough to cover monthly expenses.
There are different approaches to take, depending on the type of lifestyle you would like to have in retirement. “Fat FIRE is having enough to not only retire, but to retire early in style,” Grumet says. “Barrista FIRE is saving up enough to quit a corporate job, but still needing to continue some type of less stressful and less well paying job like working in a coffee house.” Slow FI means to work toward financial independence at your own pace. Coast FIRE refers to having enough money in retirement accounts so that you don’t have to make additional contributions. The amount will grow during the coming years and be able to support your lifestyle when you do retire.
The Benefits of FIRE
One advantage to the FIRE philosophy is that it can help you learn about money management as you focus on budgeting and monitoring your investments. It’s also a chance to leave a job that you don’t feel is a good fit. “It has freed many of unhealthy and loathsome workplaces,” Grumet says. Instead of being employed, individuals may take extended trips, spend more time with their family or volunteer for local charities.
Those with an entrepreneurial spirit might use their time on new ventures. “Many early retirees make more money in early retirement than they did while traditionally employed since they embrace their unique passions and launch small businesses without the fear of financial instability,” says Cody Garrett, a financial planner and owner of Measure Twice Financial in Houston.
The Risks of FIRE
There are several drawbacks to consider when planning to retire early. Individuals might have to pay for their own health insurance before they are eligible for Medicare. There is also a concern that investments might perform poorly and not generate the expected return.
“The worst thing that can happen is you retire at 45 and by 60 you realize you will run out of money in a couple years and must re-enter the workforce,” says Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan.
Even if your finances support you, there can be issues related to leaving the workplace at a young age. “Often early retirees are running away from what they don’t like,” Grumet says. They may not have thought about their true purpose and interests. “It is not uncommon for a FIRE advocate to reach their financial milestones and quit work to find out that they are more anxious and depressed than ever,” Grumet says. “Once a job is removed as a reason for unhappiness, often we have to face our true fears, anxieties and confront who we really want to be in life.”
How to Decide if FIRE Is Right for You
The pandemic has caused many people to take a careful look at their financial situation. “The FIRE movement is overall growing, albeit slowly,” Grumet says. If you enjoy living frugally or have dreams of spending years pursuing other interests, the FIRE movement might be an appropriate path to follow. “You must know your numbers — everything from what kind of rate of return you need to average to what age you want to retire and how much you need to live comfortably in today’s dollars,” Tallou says.
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